Optimal Currency Areas with Labor Market Frictions
88 Pages Posted: 21 Feb 2019 Last revised: 26 Feb 2020
Date Written: February 20, 2020
Abstract
I study efficiency and optimal monetary policy in a two-country monetary union with frictional labor markets. With heterogeneity in labor market frictions, the constrained efficient allocation generically cannot be achieved even if productivity shocks affecting each country are the same. The second-best optimal policy targets smaller in inflation and output gaps in the more sclerotic labor market. A quantitative calibration to the Eurozone implies welfare gains from redefining the union's inflation target to put more weight on its sclerotic members.
Keywords: Optimal Currency Areas, monetary policy, search and matching
JEL Classification: E52, F45, J63
Suggested Citation: Suggested Citation